Is it a bull market or a bear market?
It all depends on your perspective. Like the famous rabbit-duck illusion. People who want to see a rabbit see long ears, a split nose, and a soft face. Folks who want to see a duck see a split bill, a tongue, and a bright eye. There’s no clear answer.
The same thing could be said about the market right now. Those who want to see a bull market point to a growing economy, falling unemployment, and rising inflation. Industrial prices bottomed in November of last year. Since then, commodity prices are up 10%, led by metals, which are up almost 20%. Rising inflation should keep the deflationary demons at bay that plague the rest of the world right now.
Those who want to see a bear market point to falling corporate profits, a strong dollar depressing US exports, and a Fed that continues to state that they want to “normalize” interest rates, by which they mean they want to raise rates—and you don’t want to fight the Fed. The market is in a pickle: if the economy strengthens, the Fed will raise rates more quickly. If it weakens, profits will fall further. In either case, it’s hard for the market to grow when earnings fall.
S&P 500 iShares. Source: Finviz
And the charts aren’t much help. The trend is supposed to be our friend, and we’re in a long-term up-trend that began March of 2009—seven years ago. But the market topped out in July of last year. Since then we’ve seen two pullbacks of at least 10%, with lower highs and lower lows. These declines are supposed to be healthy for a bull market—keeping the “weak hands” out, and avoiding speculative excess. But they also spark a lot of fear.
So by some measures the market looks fine, and by some it looks worrisome. This is often the case—we see what we want to see. Eventually, reality comes home. It’s still unclear where the chickens will roost.
Douglas R. Tengdin, CFA
Chief Investment Officer